O.C. Judge Will Give TMI Assets a New Manager

Almost all the real estate assets of a $1-billion Newport Beach investment fund for teachers will be removed today from the control of its current managers, an Orange County Superior Court judge signaled Tuesday.

Judge Francisco F. Firmat said he will appoint a manager to oversee about 90% of the operating real estate partnerships sold to investors by Teachers Management & Investment Corp., which was sued in August by four investors who alleged that the firm had fraudulently lost $100 million, most of it in teachers’ retirement funds. The decision was immediately hailed by the plaintiffs.

The judge has cited evidence of conflict of interest and improper moving of funds by the investment company. Maurice B. Shuman and James R. Martin, who bought the company in 1987, have denied those allegations.

Neither Martin nor Shuman would comment Tuesday. Their lawyer, David Grant, called Firmat’s proposal “a fair resolution for the investors. . . . We don’t agree with the complaints, but we’re willing to do what’s best for investors.”

Firmat said Tuesday that “an interim management agreement” is nearly completed “that I think will resolve the concerns of both sides and preserve the assets.”

Under the plan, worked out by lawyers on both sides, the judge intends to appoint Dennis B. Schmucker, a veteran property trouble-shooter, as interim manager.

While Shuman and Martin would keep control of TMI itself and three limited partnerships, Schmucker would manage and examine 30 remaining limited partnerships, according to the proposal, which was accepted by lawyers for both sides. He would make a recommendation to the court next month on whether the company’s partnerships should be restructured, reorganized or sold.

TMI has raised about $1 billion from 60,000 California educators since 1968. Shuman and Martin have maintained that losses on the partnerships have resulted from California’s depressed real estate market.

Kay Seibert of Anaheim, one of those who filed the suit against TMI, was in the courtroom Tuesday and said afterward that she is generally pleased with the plan. “If they are going to recover anything,” she said of court officials, “this is the way to do it. I feel a whole lot better.”

Another investor, Steve Gorelick of Northridge, said he too is pleased “because an outside person will have more insight.” He and his wife, Betty, a teacher, have all their retirement funds invested with TMI, he said.

Under the plan, Martin and Shuman would keep control of three partnerships: Columbia Square Ltd., which owns 154 acres of land in Santa Barbara County; the Parducci Winery, which owns a winery in Mendocino County; and Napa Airport Center, which owns 138 acres of land near the city of Napa.

But Schmucker, who has been the receiver for several high-profile bankruptcy reorganization cases in the past 10 years, including Pioneer Mortgage in San Diego and American Home Mortgage in Newport Beach, would have veto power, said Ron Rus, attorney for the investors who filed the lawsuit.

“The investors are delighted. Maybe what they will hear won’t be good news, but at least they will get the truth,” Rus said.

As manager for most of TMI’s partnerships, Schmucker will have his work cut out for him, said real estate expert Sanford Goodkin, who runs a consulting company in San Diego.

“The first thing to do is find out what the truth is. Schmucker’s got to create a foundation where you can rebuild TMI or collapse the company. And hopefully it can be rebuilt,” he said.

TMI, which hired teachers to help sell its real estate partnerships to other teachers, is insolvent, according to the suit, which sought immediate appointment of a receiver to take over the management of the company and its assets.

The suit alleges that TMI commingled funds from several partnerships into a general account in violation of partnership agreements to “conceal the true financial condition of the most distressed of the TMI partnerships and . . . perpetuate a false sense of TMI prosperity.”

Filed Aug. 23, the suit also alleges a pattern of “self-dealing” that involved the “unauthorized siphoning of millions of dollars in partnership funds to affiliated entities” formed by TMI’s owners.

Though Judge Firmat stopped short of appointing a receiver to take over the company, he said during a court session Monday that he saw evidence “of commingling of funds and conflict of interest.” He did not elaborate.

Educators who invested in TMI partnership bought stakes in both undeveloped land and commercial properties. As the partnerships have dropped in value, investors have questioned whether they should continue paying the quarterly maintenance fees.

Firmat advised them Tuesday to continue making payments, which range from $75 to $100.

Investor Merrill Durfell said that advice eased his mind. “Now, at least, I know what to do,” he said.